Against the backdrop of an already unpredictable 2022, September certainly provided its fair share of financial surprises. It was the month of chancellor Kwasi Kwarteng’s mini-Budget, which resulted in the pound falling in value, the Bank of England (BoE) launching a £65 billion bail-out to stabilise the bond market, and the FTSE 100 plummeting to a three-month low.
Ironically, the aim of the mini-budget was to stimulate economic growth in the UK at a time when many financial experts have expressed concerns that the nation is on the brink of a recession. The day before Mr Kwarteng announced his economic plans, the BBC reported that the BoE feared that the UK could already be in a recession.
While the prospect of a recession provides little to cheer about, you might be surprised to learn that it could present an opportunity for investors, as it could provide greater growth potential. Read on to discover why this is. First, let’s look at what a recession is and why the UK could be entering one.
A recession is a sustained fall in a country’s productivity
The value of all the goods and services produced by a country is measured by its Gross Domestic Product (GDP). A nation falls into a recession if its GDP drops for two quarters in a row.
In August 2022, the Office for National Statistics (ONS) said that the UK’s GDP fell by 0.1% during Q2 of 2022. That said, the following month the BBC reported that revised official data suggested that economic output rose by 0.2% in the second quarter.
While the revised figures mean that the UK will not be classed as being in a recession if Q3’s figures show a downturn, concerns remain that there could still be a recession in the long term. In September, the British Chamber of Commerce (BCC) said it expected “negative economic growth” in Q3 and Q4 of 2022.
To understand why the BCC said this, we need to look at the turbulent year that has been 2022.
Covid, inflation and the war in Ukraine have made 2022 a difficult year
Like many other nations around the globe, Britain has experienced a “perfect storm” of events. At the beginning of 2022 it was still dealing with the Covid pandemic, which resulted in supply chain issues, rising energy prices and soaring inflation.
Then in February, Russia invaded Ukraine, which pushed soaring energy prices and inflation up even further. As a result, inflation reached 9.9% in August, according to official ONS data.
While low levels of inflation are seen as a sign of a healthy economy, high inflation can reduce economic growth because of spiralling prices. As increasing interest rates is one way to control rising inflation, the BoE decided to hike its rates to 2.25% in September – the seventh time they have gone up in a row.
Furthermore, a report by Reuter’s suggested that the BoE may have to make further and significant increases before the year’s out. This is likely to mean, for example, that mortgage rates could rise for many homeowners, which would reduce the amount they have to spend on the high street.
As a result, company profits could plummet, which in turn, could mean the UK falls into a recession.
A recession might be an investment opportunity
One effect of a recession is a volatile stock market, which could offer investors an opportunity to increase their money’s growth potential. Let’s consider why this is.
Investing is typically about buying as many units for as little money as possible, and a downturn in the stock market could mean that the amount you pay to invest drops significantly. If this happens, you may be able to buy more units for your money.
To demonstrate this consider the following. If the price of an investment unit is £2.50 in a robust market, a £10,000 investment buys you 4,000 units. If the value of the unit then rises to £3.50, your investment is worth £14,000, providing a profit of £4,000.
If you had purchased the units in a falling market when each unit was priced at £1, your £10,000 investment would have bought 10,000 units. If the price of each unit then increased to £3.50, your investment would be worth £35,000 – giving you a profit of £25,000!
Fear could result in a missed opportunity
Being wary about investing during an economic downturn is understandable and it should not be done lightly. That said, letting fear prevent you from even considering it might mean you miss an opportunity to expose your money to greater growth potential.
One way to overcome this and make the most of the opportunity that might be presented by a volatile market is to work with a financial planner. They can confirm whether investing during an economic downturn is the right strategy for you, as well as explaining the risks and potential benefits involved.
Get in touch
If you are interested in investing your money and would like to know whether now might be the right time for you to do it, contact us on admin@stonegatewealth.co.uk or by calling 01785 876222.
Please Note
This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article.
All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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